June 12 (Bloomberg) — Bloomberg’s Liam Vaughan discusses allegations that the world’s biggest banks manipulated benchmark foreign-exchange rates used to set the value of trillions of dollars of investments. Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said current and former traders, who requested anonymity because the practice is controversial. Vaughan speaks with Francine Lacqua and Guy Johnson on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)

Britain should investigate the manipulation of currency rates, European Union officials said after Bloomberg News revealed that traders have been rigging foreign-exchange benchmarks for more than a decade.

“They need to get to the bottom of it,” Sharon Bowles, 60, chairwoman of the European Parliament’s economic and monetary affairs committee and a member of the U.K. Liberal Democrat party, said in an interview. “It’s quite upsetting we have got another bad-news story. It’s time we managed to restore the reputation of our banks.”

The U.K. Financial Conduct Authority, created in April to oversee markets and prosecute financial crime, is looking into potential manipulation in the $4.7 trillion-a-day foreign-exchange market, a person briefed on the matter said. Bloomberg News reported yesterday that traders at some of the world’s biggest banks rigged benchmark WM/Reuters rates, according to five current and former dealers with knowledge of the practice.

Tensions between Britain and its EU partners about oversight of the financial industry have intensified after three banks were fined about $2.5 billion for rigging the benchmark London interbank offered rate, or Libor. The European Commission is considering whether to move oversight of Libor away from the U.K. to a Paris-based watchdog.

Benchmark Framework

EU regulators will be making a proposal this summer on the “framework for benchmarks” such as the WM/Reuters rates and Libor, according to Chantal Hughes, a spokeswoman for Michel Barnier, the EU’s financial-services chief. The EU last year proposed making manipulation of financial benchmarks a crime.

The WM/Reuters rate manipulation, “following on from the other recent allegations and investigations into the manipulation of oil, biofuel, gas as well as interest-rate benchmarks, once again highlight the need for a broad-based regulatory regime,” Hughes wrote in an e-mail. “Benchmarks share similar vulnerabilities.”

In the U.S., Carl Levin, a Michigan Democrat who heads the Senate Permanent Subcommittee on investigations, said in a June 12 e-mailed statement that the U.S. Treasury Department should “reconsider its ill-advised exemption” of foreign-exchange swaps and forward contracts from the 2010 Dodd-Frank Act.

Regulators should stop “price-rigging abuses” by “finalizing the long-overdue Merkley-Levin provisions on proprietary trading and conflicts of interest,” Levin said, referring to provisions he sponsored with fellow Senate Democrat Jeff Merkley of Oregon.

‘Banking Scandal’

U.S. Representative Maxine Waters, the top Democrat on the House Financial Services Committee, called the news “another major banking scandal” and said in a statement it warrants collaboration between regulators and the Justice Department to determine whether criminal charges are warranted.

“Federal regulators should further assess potential reference-rate reforms,” the California lawmaker said. “As we’ve seen with the Libor cases, it is clear that these systems remain vulnerable to fraud and abuse.”

The Office of the Comptroller of the Currency, which regulates U.S. national banks, supervises foreign-currency trading within the firms and takes the allegations “very seriously,” said Bryan Hubbard, an OCC spokesman. The agency is “working with other regulators, domestically and internationally, to look into these concerns,” he said.

‘Maintaining Confidence’

Britain’s FCA, which took on some of the duties of the disbanded Financial Services Authority, is already working with global regulators to examine the integrity of benchmarks, including those used in valuing derivatives and commodities after traders at Barclays Plc (BARC), UBS AG (UBSN) and Royal Bank of Scotland Group Plc were found to have colluded to rig benchmark interest rates for profit. Regulators also are investigating benchmark rates for the crude-oil and swaps markets.

“Regulators have an important role maintaining confidence and integrity in markets, and should rapidly act on any suggestion that untoward things are happening,” said Paul Myners, a Labour Party member of Parliament’s House of Lords and financial-services minister from 2008 to 2010. “It is vital that the FCA show that it’s willing to be much more aggressive than their predecessor. This will be their first test.”

Chancellor of the Exchequer George Osborne moved to replace the FSA after the financial crisis. Lawmakers criticized the regulator for failing to prevent the rescues of Northern Rock Plc, RBS (RBS) and Lloyds Banking Group Plc. The FSA was created in 1997 by then-Chancellor Gordon Brown.

Least Regulated

The currency market, the biggest in the financial system, is one of the least regulated as it takes place away from exchanges. Traders colluded with counterparts at other firms to boost chances of moving the WM/Reuters rates, according to two of the people with knowledge of the manipulation.

The data are collected and distributed by World Markets Co., a unit of Boston-based State Street Corp. (STT), and Thomson Reuters Corp. (TRI) Bloomberg LP, the parent company of Bloomberg News, competes with New York-based Thomson Reuters in providing news and information, as well as currency-trading systems and pricing data. Bloomberg LP also distributes the WM/Reuters rates on Bloomberg terminals.

“The process for capturing this information and calculating the spot fixings is automated and anonymous, and the rates are monitored for quality and accuracy,” State Street said in an e-mailed statement. The data are derived from “multiple execution venues through a streaming rather than solicitation process,” the company said.

Spot foreign-exchange transactions aren’t considered financial instruments in the same way as stocks and bonds. They fall outside the EU’s Markets in Financial Instruments Directive, which requires dealers to take all reasonable steps to ensure the best possible results for their clients.

That should be changed, according to Bowles, the EU lawmaker who unsuccessfully applied to be governor of the Bank of England last year.

Market abuses are “part of the bonus culture,” Bowles said. “You are in a competitive race to show you are better and can earn more.”

ISDA Master Agreement

The ISDA master agreement is the most commonly used master contract for OTC derivative transactions internationally. It is used to govern many of the financial transactions between the City of Detroit and Wall Street. Below are links to the agreement and sites with explanations.